After a week in which benchmark oil prices gained more than they have in any five-day period since 2009, some observers were ready to call a bottom to the market.
But others are not so sure that the rally will last.
North Sea Brent crude futures started the week at about US$50 a barrel and ended the week nearly 16 per cent higher at $57.80.
But it seemed that as many professional market watchers were calling the rally a “dead cat bounce” as were calling it a turning point after the severe drubbing that had pushed prices down by 60 per cent from a high last summer above $115 a barrel to their low of just above $46.50 in the middle of last month.
A survey of 32 market prognosticators by Bloomberg News last week found that they were almost evenly split between those who forecast oil prices to rise over the next month and those who expected them to fall.
The chiefs of the world’s biggest oil companies typically steer clear of market forecasting, and BP’s Bob Dudley hedged his bets last week when he was asked for his views, following the company’s fourth-quarter results in which full-year profit fell 10 per cent and this year’s projected capital expenditure was slashed.
But he did paint a fairly gloomy picture. “It feels like 1986 to me, where the price dropped at that time from $40 to $9 a barrel and then stayed down for quite some time,” Mr Dudley said. “I think this is quite serious.”
Some of the bearish signs that Mr Dudley pointed to included the fact that China was growing more slowly than it had been for some time, that oil inventories were filling up around the world and there is an increasing amount being stored now in giant ships by traders hoping that prices rise later in the year.
“When, traditionally, that happens it can go on for quite a while. So for us the prudent way to manage the company is to plan on one, two, three years and rebase so that we can balance our resources and use of funds at $50” a barrel of oil.
While that is an authoritative voice counselling caution, Mr Dudley repeatedly emphasised that he was not making a prediction. Oil company executives have no better track record at predicting oil prices — at least publicly — than most. That is why they do not like to predict publicly.
Traders, on the other hand, like to voice their predictions often and loudly.
Andrew Hall — the head of one of the world’s oldest commodities trading firms, Phibro, and a $4 billion hedge fund, Astenbeck — has been telling his investors that oil will rebound to between $70 and $80 a barrel “in the long run”, a bullish sentiment he reiterated last week.
"There have been two constants of the oil market," he wrote. "The first is that demand always grows. The second is that supply from existing resources always falls because of depletion."
That is certainly true, but timing, as Mr Hall knows, is the key to profits versus losses.
So apart from futures trading, what were the important signs in the market last week?
Saudi Arabia, the world’s largest crude exporter, cut the official selling price for its Arab Light crude for Asian buyers by 90 cents to a discount of $2.30 below the Middle East benchmark, the lowest price in nearly a decade and a half.
Others, including Iraq, Iran, Kuwait and the UAE, will almost certainly follow suit. The price war that gave the oil bear market impetus at the end of last summer is still being waged.
On the other hand, oil rig use in the US declined by another record amount, suggesting that the Saudi Arabian-led strategy of choking off the burgeoning US shale oil supply was working. According to the oil services company Baker Hughes, the US oil rig count fell 83 to 1,140, bringing the cumulative decline to 435 in the past nine weeks.
What to conclude at this point? Tom Pugh of Capital Economics reckons the markets will teeter back and forth just a little bit higher than where they finished the week.
“We estimate that an oil price of about $60 to $70 per barrel is high enough to prevent a collapse in US shale and other oil industries and allow production to increase to match increased demand,” he said at the end of last week. “But it would also be low enough to prevent a repeat of the massive increases in production we have seen over the last few years.”
What seems certain, however, is uncertainty. “Of course, oil prices will be extremely volatile over the next year,” he said.
amacaulaey@thenational.ae
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